Copper benefitting from low inventories

Securities firm BBN James Capel, in a recent quarterly review, sizes up the situation succinctly. Given current inventories, it notes metal prices are less likely to fall drastically should the general economy deteriorate, compared with past recessionary periods.

“On the other hand, if the economy continues along with acceptable growth, the paucity of metal in the system could cause surprising price strength in the event of any unexpected production interruptions,” the firm’s researchers write.

Reporting low inventories at all levels, from consumers to fabricators to producers, is the copper industry. Both major clearing houses, the London Metal Exchange and the Commodity Exchange in New York, have had low levels of the metal on hand.

Copper, recently trading in London in the $1.10(US) per lb range, enjoyed an excellent first half this year, averaging about $1.37. To the end of November, the metal averaged about $1.31. In 1988, copper averaged $1.18 and in 1987, 81 cents .

BBN says total producer and commodity exchange inventories have been running about 450,000 tons since the first quarter of 1989 (about 50% of average), up from the minimum level of 350,000 tons in 1988. “Consumers and fabricators continue to run with barely working stocks of metal, leavin g themselves vulnerable to higher prices if supply problems develop,” writes the firm. “This mode of operation in the past year is what caused the copper price to average better than in 1988.”

Demand is considered sufficient to keep inventories low at the producer level. BBN says demand during the last year appears to have been supply-limited, rising when the metal became available.

“The electrical industry continues as the primary user of copper, and the combination of the growth in demand in industrialized countries, and the broadening of the base as the usage expands to more countries, ensures continued strong demand unlikely to be interrupted until the economy turns down,” says BBN.

“Simply put, copper is used throughout the economy, and is sensitive to its broad economic swings, making it unlikely to deviate from course.”

On the supply side, the industry has had its troubles. In 1988, a weakening in mine production of copper concentrates in the non- communist world in 1988 manifested itself in higher prices. Strangely, copper smelter and refinery production recorded new highs in 1988. A variety of mining problems, labor (Highland Valley) and civil unrest (Bougainville) among them, held back production this year. In recent months, new record refined levels were set again.

For 1990, BBN is forecasting an average copper price of $1.05, a level at which it says most copper mines are comfortably profitable.

While the markets for copper in the U.S., Japan and Europe are considered mature, the market in Asia is expected to grow significantly, says an officer with Magma Copper.

John Champagne, vice-president of marketing and sales, in a recent speech to Wire Association International in Arizona, says Korea, Taiwan, Thailand, Singapore and Malaysia, in particular, should provide excellent growth potential.

The rate of expansion for these Asian markets has been better than 12% annually during the past 15 years, Champagne says. That rate is unlikely to continue, although growth about five times greater than the world average is expected. By mid-1990, total demand by these Asian markets will approach the demand levels in Japan, he says.

Rhodium was selling well above its better-known sister platinum group metals platinum and palladium, but recently the price of the metal took off, to the $2,000(US) per oz range.

It must be pointed out there is not a large market for rhodium, which had been trading in the $1,200-1,300 range and which is used in the manufacture of autocatalysts for motor vehicle emission control.

Among the reasons mentioned for the price rise are production troubles in South Africa (the major producer-nation of the metal), the reluctance of the Soviets to sell into the spot market, and the efforts of automakers in Europe to sign supply contracts for the 1990s.

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